Predetermined Prices and the Persistent Effects of Money on Output
This note illustrates a model of predetermined pricing, where firms set a fixed schedule of nominal prices at the time of price readjustment, based on the work of Fischer (1977). This contrasts with the model of fixed pricing, the specification underlying most recent dynamic sticky-price models. It is well known that predetermined pricing cannot generate substantial persistence in the real effects of monetary shocks when prices are set via fixed duration contracts unless the contracts are of long duration. However, we show that with a probabilistic model of price adjustment, a predetermined pricing specification can produce almost as much persistence as the more conventional model of fixed prices, without the assumption of long average contract duration.
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Volume (Year): 35 (2003)
Issue (Month): 5 (October)
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- V. V. Chari & Patrick J. Kehoe & Ellen R. McGrattan, 1996.
"Sticky Price Models of the Business Cycle: Can the Contract Multiplier Solve the Persistence Problem?,"
NBER Working Papers
5809, National Bureau of Economic Research, Inc.
- V. V. Chari & Patrick J. Kehoe & Ellen R. McGrattan, 2000. "Sticky Price Models of the Business Cycle: Can the Contract Multiplier Solve the Persistence Problem?," Econometrica, Econometric Society, vol. 68(5), pages 1151-1180, September.
- V. V. Chari & Patrick J. Kehoe & Ellen R. McGrattan, 1998. "Sticky price models of the business cycle: can the contract multiplier solve the persistence problem?," Staff Report 217, Federal Reserve Bank of Minneapolis.
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NBER Working Papers
2476, National Bureau of Economic Research, Inc.
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- Olivier Jeanne, 1997.
"Generating Real Persistent Effects of Monetary Shocks: How Much Nominal Rigidity Do We Really Need?,"
NBER Working Papers
6258, National Bureau of Economic Research, Inc.
- Jeanne, Olivier, 1998. "Generating real persistent effects of monetary shocks: How much nominal rigidity do we really need?," European Economic Review, Elsevier, vol. 42(6), pages 1009-1032, June.
- Taylor, John B, 1979. "Staggered Wage Setting in a Macro Model," American Economic Review, American Economic Association, vol. 69(2), pages 108-13, May.
- Fischer, Stanley, 1977. "Long-Term Contracts, Rational Expectations, and the Optimal Money Supply Rule," Journal of Political Economy, University of Chicago Press, vol. 85(1), pages 191-205, February.
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